Royce Funds – Small-Caps Rebound In 4Q, But Lag For 2014

Updated on

Quarterly Flash: Small-Caps rebound in 4Q, but lag for 2014 by Royce Funds

We believe that widening credit spreads, increasing volatility, and decreasing stock correlation should help active management and allow stock pickers to emerge as performance leaders. We also expect equity returns to remain attractive, though we anticipate a decrease from their currently high levels. Finally, we think that investing in fundamentally sound small-cap companies remains an excellent way to build long-term wealth.

Market Comments

After a dreadful third quarter, small-caps rallied in October and December to outpace their large-cap counterparts in the fourth quarter. The small-cap Russell 2000 Index was up 9.7% for the quarter versus gains of 4.9% for both the large-cap Russell 1000 and S&P 500 Indexes. The tech-oriented Nasdaq Composite was up 5.4%, just ahead of its large-cap counterparts.

For the year ended 12/31/14, however, small-caps were no match for their larger siblings. The Russell 2000 finished the year up 4.9% compared to gains of 13.2%, 13.7%, and 13.4% for the Russell 1000, S&P 500, and the Nasdaq Composite, respectively.

Although all four indexes delivered outstanding performance for the trailing three- and five-year periods ended 12/31/14 (15%+ on an average annual total return basis), small-caps lagged large-caps for the three-year period (largely due to 2014 performance).

Small-caps While the Russell 2000, Russell 1000, and S&P 500 reached new highs in December, the high established by the Nasdaq Composite in March 2000 remained intact.

In sharp contrast to their domestic peers, non-U.S. equities extended their third-quarter performance woes through the end of 2014. The Russell Global ex-U.S. Small Cap Index was off 4.5% while the Russell Global ex-U.S. Large Cap Index was down 3.7% during 2014’s fourth quarter. For the full year the story was similar. Both indexes were in negative territory, with the Russell Global ex-U.S. Small Cap and Russell Global ex-U.S. Large Cap Index off 3.6%.

Within the Russell 2000, Utilities and Health Care were the best-performing sectors for the quarter and the full year.

For the second consecutive quarter, growth led value within small-cap. The Russell 2000 Growth Index finished the quarter up 11.1% versus a gain of 9.4% for the Russell 2000 Value Index. Full year results were similar as the Russell 2000 Growth gained 5.6% versus 4.2% for the Russell 2000 Value Index. Three-, five-, and 10-year results also favored growth. (Ouch!)

Micro-cap results, as measured by the Russell Microcap Index, improved significantly during the quarter, with the index up 11.2%; for the full year, the micro-cap index was up 3.6%, trailing its larger peers. In contrast, the Russell Midcap Index continued its solid performance for the quarter (up 5.9%) and for the full year (up 13.2%).

Fund Performance
4Q 2014* (%) 1 YR (%) 5/2/2013
Interest Rate
Low*
 (%)
5-Year (%) 10-Year (%)
Royce Funds - Small-Caps Rebound In 4Q, But Lag For 2014 Pennsylvania Mutual 5.3 -0.7 25.1 12.8 8.0
• Flagship Fund managed by Chuck Royce that invests in small-cap companies.
• Outperformed Russell 2000 for the 10-year, 15-year, 20-year, 25-year, and 30-year periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Premier 1.0 -0.9 23.0 12.1 9.3
• Managed by Chuck Royce, this concentrated portfolio focuses on small-cap companies between $750 million and $2.5 billion in market cap.
• Outperformed Russell 2000 for the 10-year, 15-year, 20-year, and since inception (12/31/1991) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Micro-Cap 5.5 -4.1 18.1 7.5 6.8
• Managed by Jenifer Taylor, the Fund invests primarily in micro-cap companies with market caps up to $750 million.
• Outperformed Russell Microcap for the 10-year period. Outpaced Russell 2000 for the 15-year, 20-year, and since inception (12/31/1991) periods.
Russell Microcap Index 11.2 3.6 35.9 16.1 6.0
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Low-Priced Stock -1.7 -3.4 11.3 5.1 5.3
• Managed by Jim Stoeffel, the Fund focuses on small-cap companies whose average cost per share in the Fund’s portfolio is less than $25.
• Outperformed Russell 2000 for the 15-year, 20-year, and since inception (12/15/1993) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Royce Funds - Small-Caps Rebound In 4Q, But Lag For 2014 Total Return 5.5 1.3 21.8 13.3 7.5
• Managed by Chuck Royce and Jay Kaplan, the Fund focuses on dividend-paying small-cap stocks — it has been one of the least volatile Royce funds over the last five years.
• Outperformed Russell 2000 for the 15-year, 20-year, and since inception (12/15/1993) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
4Q 2014* (%) 1 YR (%) 5/2/2013
Interest Rate
Low*
 (%)
5-Year (%) 10-Year (%)
Heritage 3.7 -1.1 16.1 10.5 8.0
• Managed by Chuck Royce, Jim Harvey, and Steven McBoyle, the portfolio invests primarily in companies with market capitalizations up to $15 billion.
• Outperformed Russell 2000 for the 10-year, 15-year, and since inception (12/27/1995) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Opportunity 6.1 -0.5 28.4 15.3 8.1
• Managed by Buzz Zaino and Bill Hench, the Fund uses an opportunistic approach to invest primarily in small-cap stocks.
• Outperformed Russell 2000 for the 3-year, 10-year, 15-year, and since inception (11/19/1996) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Special Equity ** 8.6 1.1 22.2 12.5 8.2
• Managed by Charlie Dreifus, the Fund combines classic value analysis with accounting cynicism.
• Outperformed Russell 2000 for the 10-year, 15-year, and since inception (5/1/1998) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Value 2.4 0.0 23.0 10.1 8.2
• Managed by Jay Kaplan, the Fund invests primarily in a limited portfolio of companies up to $5 billion in market capitalization.
• Outperformed Russell 2000 for the 10-year and since inception (6/14/2001) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Value Plus 6.8 3.9 28.0 11.3 7.1
• Managed by Chip Skinner, the Fund invests primarily in companies with market capitalizations up to $5 billion that we believe are undervalued and offer above-average growth prospects.
• Outperformed Russell 2000 for the since inception (6/14/2001) period.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
4Q 2014* (%) 1 YR (%) 5/2/2013
Interest Rate
Low*
 (%)
5-Year (%) 10-Year (%)
100 3.4 -3.3 19.0 10.5 8.5
• Managed by Lauren Romeo and Chuck Royce, the Fund invests in approximately 100 companies with market capitalizations up to $5 billion.
• Outperformed Russell 2000 for the 10-year and since inception (6/30/2003) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Dividend Value 2.3 -2.1 16.7 13.2 8.5
• Managed by Chuck Royce and Jay Kaplan, the Fund focuses on dividend-paying companies with market capitalizations up to $15 billion.
• Outperformed Russell 2000 for the 10-year and since inception (5/3/2004) periods.
Russell 2000 Index 9.7 4.9 31.1 15.5 7.8
Global Value -5.9 -5.8 -0.5 4.2 N/A
• Managed by David Nadel, Steven McBoyle, Dilip Badlani, and Jim Harvey, the Fund invests primarily in both U.S. and non-U.S. equity securities with market caps up to $5 billion.
Russell Global
Small Cap Index
1.1 -0.3 13.5 9.6 6.9
International Smaller-Cos -6.4 -7.3 -0.1 5.1 N/A
• Managed by David Nadel, the Fund invests primarily in equity securities issued by non-U.S. companies with market caps up to $5 billion.
• Outperformed Russell Global ex-U.S. Small Cap for the since inception (6/30/2008) period.
Russell Global ex-U.S.
Small Cap Index
-4.5 -3.6 3.8 6.4 6.6
Special Equity Multi-Cap 4.2 9.3 32.7 N/A N/A
• Managed by Charlie Dreifus, the Fund invests primarily in companies with market caps greater than $5 billion and combines classic value analysis with accounting cynicism.
Russell 1000 Index 4.9 13.2 33.5 15.6 8.0

Leave a Comment